Contra inflationists

Was looking around the other day for information on gas prices and came up with this (.xls) from the US Energy Information Administration.  And, since it’s from the government, it must be true.

Here’s a chart showing the nominal gas prices from 1919 to 1973.  For those not clear about what nominal means, it is the price unadjusted for inflation.  It is the actual physical dollars and cents amount one pays for an item.

Why this is so important is that modern economists love to use the term “real” which simply means adjusted for inflation.  Why should it matter really, if you’re paying the same relative amount?  Isn’t it purchasing power that’s significant?

First, notice that nominal gas prices in 1920 and 1960 were the same.  In forty years, what you paid to fill up your car was exactly the same as what your grandfather paid to fill up his car.

Of course, there’s some differences.  One, the car you’d be driving was substantially better and you’d have a multitude more places to go and things to do.  And the number of cars had multiplied many time.

We’d certainly expect gas prices to fall during the depression and the war.  And we’d expect gas prices to rise after the war as millions new cars and drivers entered the market.  But notice how prices rose gradually and eventually settled.

This would be wholly consistent with Austrian theory as obviously consumer preferences had shifted, the price system reflected such, and producers moved resources into those areas more demanded.  Given that gas production is very capital intensive, and a much higher order level of production, that prices rose over a several year period until settling would make perfect sense.

And then for over a decade, gas prices remained unchanged.  Though not shown on the graph, the “real” price of gas fell by well over a third.

Back to the problem of “real” prices.  Austrians stress the importance of the non-neutrality of money.  Stressing “real” prices, i.e. adjusted for inflation, masks the true problem.  Prices do not all rise at the same rate, nor at the same time.  This distorts the economic calculations of entrepreneurs as well as consumers.  That’s one of the reasons why it’s so important to show nominal prices.

The other reason is of course that even without inflating fuel prices, the automobile sector of the economy flourished.  And there was no lack of gas stations to fill those cars.  Inflation is not required for growth.

I could go on, but suffice to say, isn’t it interesting at the least to see how gas prices, the actual amount paid, remained virtually unchanged for 60 years.

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